For retirement, are R-Bonds right for you?

The Treasury considers a 401(k)-style plan for people who don’t have one at work

Many experts bemoan the fact that half of working Americans—call it 75 million—don’t have an employer-sponsored retirement plan. And those workers, many of whom are not saving for retirement using an IRA or other type of retirement savings account, are at risk of not being able to sustain their pre-retirement standard of living.

For these workers, lawmakers, policy experts and others have long suggested that automatic IRAs would help solve that problem. But proposed laws to create 401(k)-like accounts for workers who don’t have access to employer-provided qualified pension plans have largely died on the vine. For instance, Rep. Richard Neal, D-Mass., introduced yet another Automatic IRA Act in May of this year, but experts give it little chance of becoming law any time soon. The proposed law would require employers to automatically enroll employees in an IRA unless the employee opts out.

Enter R-Bonds, which so happens to be the default investment in Neal’s automatic IRA proposal. Yes, the Treasury Department, which first began working on the program in 2009, will roll out in January retirement or R-Bonds to encourage savings by Americans not enrolled in a company-sponsored pension, according to a recent Financial Advisor magazine report.

Speaking at the Women’s Institute for a Secure Retirement annual symposium in Washington, D.C. last month, Mark Iwry, a deputy assistant secretary for retirement and health policy at the Treasury Department, said the R-Bonds “would have the tax characteristics of an IRA and be eligible to be rolled over into an IRA once the savings reach a now-unspecified threshold,” according to a recent report in Financial Advisor magazine.

A proposal under consideration at the Treasury Department could create a special kind of savings bond for people who don’t have retirement plans at work.

According to the magazine, Iwry said that “the R-Bonds would be aimed at workers at companies that don’t sponsor retirement programs of any kind, part-time employees not eligible for plans their companies sponsor, and the self-employed or not employed.” With the R-Bonds, an employee could have an automatic payroll deduction to make contributions and the bonds would not be designed to compete with company savings plans. And the best part of all: Iwry said the R-Bond program would not require congressional authorization to begin. Read also Administration explores ‘R bond’ as option for retirement accounts (registration required).

Of course, this plan is by no means a done deal. “Treasury continues to study options to encourage Americans to increase their retirement savings,” a Treasury official says. “No decisions have been made about new policies or programs.”

Still, it’s worth asking: What do experts have to say about R-Bonds? And should you consider using them if and when the Treasury Department rolls them out?

A promising idea

In the main, experts are fond of R-Bonds. “I think this is a pretty good idea,” said Anna Rappaport, the president of a Chicago-based retirement consulting practice.

The R-Bond program is for “new savers with the hope that low income [workers] in particular and those without any way to save at the workplace will take advantage it,” said M. Cindy Hounsell, the president of the Women’s Institute for a Secure Retirement, a nonprofit organization based in Washington, D.C.

And Judy Miller, the executive director of American Society of Pension Professionals and Actuaries (ASPPA), a national organization for career retirement-plan professionals based in Washington, D.C., said the following: “I don’t see this expanding the number of people who have retirement savings, but I do see it as a step toward something like the automatic IRA proposal.”

According to Hounsell, the new R-Bonds--like other government-issued savings bonds–wouldn’t pay very much interest, but they would, at least, be guaranteed by Uncle Sam. Details, however, including whether they will be called “R” or retirement bonds, are still in flux. For one, some at the Treasury Department, including Iwry, want the R-Bonds to be used for long-term savings as they would be in an automatic IRA, while some want a workplace starter savings account but not a retirement account.

In its current construct, Hounsell and others said the R-Bonds might work a bit like the Treasury Department’s I-Bond program, a program Iwry gets credit for launching during the Clinton administration.

I-Bonds are a low-risk, liquid, inflation-adjusted savings product. The bonds have an annual interest rate, currently 1.38%, that reflects the combined effects of a fixed rate and a semiannual inflation rate. At present, you may purchase I-Bonds via TreasuryDirect or with your federal tax refund. Click here to visit the I-Bond website.

Another possible advantage with the R-Bond program: “With R-Bonds there would be less chance of ‘lost participants,’ since presumably the Treasury knows where you are at least once a year when you file a tax return,” said Rappaport.

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